Good morning, ladies and gentlemen, and welcome to the EastGroup Properties First Quarter 2021 Earnings Conference Call and Webcast. This call is being recorded on Wednesday, April 24, 2024. I would now like to turn the conference over to Marshall Loeb, President and CEO. Please go ahead.

Good morning, and thanks for calling in for our first quarter 2024 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call, and since we'll make forward-looking statements, we ask that you listen to the following disclaimer.

Please note that our conference call today will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings press release, both available on the Investor page of our website and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the safe harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements in the earnings press release, along with our remarks, are made as of today and reflect our current views about the company's plans, intentions, expectations, strategies, and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks, whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Please see our SEC filings included on our most recent annual report on Form 10-K for more detail about these risks.

Thanks, Keena. Good morning. I'll start by thanking our team for another strong quarter. The team continues performing at a high level and finding opportunities in an evolving market. Our first quarter results demonstrate the quality of the portfolio we've built and the resiliency of the industrial market. Some of the results produced include funds from operations rising 8.8%, excluding a 2023 involuntary conversion. For over a decade now, our quarterly FFO per share has exceeded the FFO per share reported in the same quarter prior year; truly a long-term trend. Quarter end leasing was 98%, with occupancy at 97.7%. Average quarterly occupancy was 97.5%, which, although historically strong, is down from first quarter 2023. Re-leasing spreads for the quarter were solid at 58% GAAP and 40% cash, with cash same-store NOI rising 7.7% for the quarter. Finally, we have the most diversified rent roll in our sector, with our top 10 tenants falling to 7.8% of rents, down 70 basis points from first quarter 2023 and in more locations. We view our geographic and revenue diversity as strategic paths to stabilize future earnings, regardless of the economic environment. In summary, we're pleased with our performance out of the gate for 2024, while being mindful of the near-term economy. Today, we're focused on value creation via raising rents, acquisitions and development. This allowed us to end the quarter at 98% leased and continue pushing rents throughout the portfolio. On the acquisition front, we continue to patiently search for the right opportunities. We're excited to acquire Spanish Ridge in Las Vegas, which we announced earlier in the year. This acquisition has also allowed us to move to self-management in the market, further raising our returns. In keeping with our strategy of targeting high-growth markets, we're excited near term to enter the Raleigh market, a market we've looked at for years. We're attracted to its economic stability and growth due to the mix of state capital, large educational presence, and technology companies that follow the university presence, topography constraints for new development, and long-term population growth. Our acquisitions will continue to be guided by two criteria: One, to be accretive; and secondly, raising the long-term growth profile of the portfolio, thus creating NAV as well. As we've stated before, our development starts depend on market demand within our products. Based on our read through, we're forecasting 2024 starts of $260 million. Though our developments continue leasing with solid prospect interest, we're seeing longer, deliberate decision-making. As always, we ultimately follow demand on the ground to dictate pace. Based on the decision-making time frames we're seeing, I expect our starts to be more heavily weighted to the second half of 2024.

Good morning. Our first quarter results reflect the terrific execution of our team, the solid overall performance of our portfolio, and the continued success of our time-tested strategy. FFO per share for the quarter exceeded the midpoint of our guidance range at $1.98 per share compared to $1.82 for the same quarter last year, an increase of 8.8% excluding voluntary conversion gains. As a reminder, we typically incur about one third of our annual G&A expense in the first quarter, primarily due to the accelerated expense of newly granted equity-based compensation for retirement-eligible employees, which totaled approximately $1.7 million during the quarter. From a capital perspective, we continue to access the equity market. During the quarter, we settled shares for gross proceeds of $50 million. After quarter end, we settled an additional $25 million, all at an average price of $183 per share. We have an additional $52 million in commitments still outstanding at an average price of $180. Debt maturities are minimal this year with $50 million in August and $120 million in mid-December. Although capital markets are fluid, our balance sheet remains flexible and strong with increasingly healthy financial metrics. Our debt to total market capitalization was 16.3%; unadjusted debt-to-EBITDA ratio decreased to 4x; and interest and fixed charge coverage increased to 10.4x. Looking forward, we estimate FFO guidance for the second quarter to be in the range of $1.99 to $2.07 per share and $8.17 to $8.37 for the year, which is unchanged from our prior guidance. Those midpoints represent increases of 7.4% compared to the prior periods, excluding insurance-related gains on involuntary conversion claims. The range midpoints for cash same-store growth and occupancy remained unchanged from prior guidance. We increased our reserves for uncollectible rent by $500,000 to $2.5 million or 0.39% of revenue. This is a result of our uptick in bad debt in the first quarter that was driven primarily by three tenants in varying industries. Overall, our collections remain healthy. We also increased our G&A guidance by $900,000 to $20.8 million. Much of the increase relates to less capitalized development costs as a result of lowering our projected development starts for the year. In closing, we were pleased with our first quarter results, especially considering the economic uncertainty and prolonged higher interest rate environment. As we have in both good and uncertain times in the past, we will rely on our financial strength, the experience of our team, and the quality and location of our shallow bay portfolio to lead us into the future.

Thanks, Brent. In closing, I'm proud of our first quarter results and the value our team is creating. Internally, we continue to grow earnings while strengthening the balance sheet. Externally, the capital markets and the overall environment remain clouded, which has led to a continued decline in starts. In the meantime, we're working to maintain high occupancies while pushing rents. In spite of the uncertainty, I like our positioning as our portfolio is benefiting from several long-term positive secular trends such as population migration, near-shoring and onshoring trends, evolving logistics chains, and historically lower shallow bay market vacancies. We also have a proven management team with a long-term public track record. Our portfolio quality in terms of buildings and markets is improving each quarter. Our balance sheet is stronger than ever, and we're expanding our diversity in both our tenant base as well as our geography. We would now like to open up the call for questions.

Your first question comes from the line of Jeff Spector from Bank of America.

Marshall, in your opening remarks, you mentioned the resilience in the sector. It's clear that there is some concern in the market regarding that comment on resilience. I would like to delve deeper into this topic, particularly regarding the delays in leasing decisions and the impact of economic uncertainty, even with strong consumption and rising e-commerce. Is this situation primarily driven by the Federal Reserve and interest rates? Did tenants overestimate their space needs? Could you elaborate on this?

Okay. Sure. Happy to add my color. And on the resiliency, yes, we see it and believe it's there. Maybe if I take a look back and kind of a look ahead. We've had this great run the last handful of years, all of us as well as our industrial peers. We’ve had kind of this historic run right now. You touched on it. I view it as a combination of interest rates. Earlier in the year, everyone thought they were about to drop in March, then it was June, and now it's maybe December that keeps getting pushed out, along with just a lot of troubling global unrest. My kind of analysis is that short-term decisions are more like retail and things like that; the consumer is holding up well. If you went through our portfolio, what's been interesting for a couple of quarters now is that we have prospects and have conversations on our vacant spaces, and I think people are really taking a wait-and-see approach. They're maybe waiting for a little more business confidence. We've seen supply coming down, and there's just a lot of people on the sidelines. We put it in our slide deck; if people have a chance to go to our Investor Relations on our website, it's Slide 14, where renewals have really picked up in our sector. I think there's a lot of people taking a wait-and-see approach. So right now, I'm glad we're still 98% leased. We're pushing rents, and supply has dropped. What we need is that kind of third leg of the stool is a pickup in business confidence. Then I think you'll see a growth spurt. Again, I see the resiliency you mentioned; e-commerce isn't slowing down, and we have onshoring and near-shoring trends with companies moving to the Carolinas, Florida, Texas, Arizona, all of our markets. It's been a great few years; longer term, I'm still really excited about where we fit into our part of the playground. I think right now, people are pushing off expansions, maybe saying let's wait a quarter or two and get a little more settled.

Okay. And then if I could ask a follow-up. You also commented that you think the markets will tighten later in '24. Anything more to elaborate on that? Any specific timing, fourth quarter, third quarter, more into '25?

I'm optimistic. We've experienced six consecutive quarters of declines in starts. Our product, shallow bay, has seen much fewer deliveries and availability compared to the larger boxes. As confidence grows, I feel aligned with our tenants and prospects. I believe that in about 90 days, we just need a bit of positive economic news. If I draw a parallel to retail, when people return to the store, there won't be much inventory available. For our product type, it will sell out quickly, leading to an increase in rents. I think our competition in development comes mainly from local regional developers who don't have the financial strength that we do. This positions us to initiate development much sooner than our private competitors.

Your next question comes from the line of Eric Borden from BMO Capital Markets.

I just want to talk a little bit about the acquisition opportunities as they appear to be increasing. I mean I was hoping you could speak to the cap rate expectations for the remainder of the year. And how they compare to your development yields in the current pipeline?

Okay. Sure. Good question. The development leasing has slowed, although we are signing development leases, so I don't want to discount that. We signed several of our projects during the quarter. We noticed acquisitions, as we had been in the market, we were just getting more yeses. So to date, with the Raleigh acquisition that we mentioned in, we bought seven projects for about $200 million; all those buildings are just over a year old on kind of a weighted average. Everything we've acquired has been new, which raises our growth profile going forward. We've added a dime on matching the quarter and the equity raised versus the going in gap yield that adds a dime to our earnings. We view this as a nice way to pivot as development slows, but the acquisition window opens up. This year, we've been able to pick up a fair amount, with a little more competitive out of the gate. We're still seeing cap rates for portfolios at really low rates, like sub-5, and it doesn't even have to be a large portfolio. What we've bought has been more one-off with someone needing to close quickly. Our pitch has been we can close within about a month. Certainly, in the last year, having capital and the ability to close quickly has moved us forward. I'm optimistic about the acquisitions front; we'll still be able to find brand-new development-type properties with GAAP yields around 6.25% to 6.5%. Our development yields, they've come in above pro forma, typically around 7%, so the team has done a nice job sourcing good opportunities. I think the window will close when interest rates start to move, so I think it's a moment in time, and we have a couple of quarters to see these opportunities, assuming capital is available in the market.

Your next question comes from the line of Craig Mailman from Citi.

Marshall, I just want to go back to your commentary that things are taking longer. With that in mind, though, from a leasing perspective, you guys had a big first quarter for new leasing volume. Could you talk a little bit about the cadence of that and what the pipeline looks like into 2Q so far relative to what you had in 1Q?

Thanks, Craig. We actually signed more leases in the first quarter this year than we did last year by a few hundred thousand. That was good news and it's really flat or roughly flat with fourth quarter of '23. We've got good leasing volume. I've received an email from one of our guys in the field, and his description was 'tire kickers abound', so we've got activity and have leases out. One of our team members said, 'I used to get excited when we sent leases out, and I still do, but I'm not waiting at the mailbox.' If people want space, I think the dollar commitment has gotten so big that it's hesitating a little more, and there's not a fear of if I don’t take this, it won’t be available tomorrow. I feel good, and I think it will be like the acquisition window; I'm hopeful it turns quickly.

And apologies if you answered this already, but this quarter it looked like Orlando and L.A. were partly contributors. Is this sort of a one-off hit in retention or is there something going on? Any other move-outs this year to contend with?

No. You broke up for a moment, Craig, but thankfully we do have two tenants moving around in L.A. If we can get both leases signed, it puts L.A. to bed for the balance of 2024. The market is not great, but thankfully it's a little under 6% of our NOI. I believe the market will heal and normalize a little bit before we have to deal with anything else in L.A. So we lost two tenants, but if we can land these two, we'll be able to backfill quickly.

Okay. And then just if I could sneak one more in. Guidance assumes a pretty good ramp up through the back half of the year. How much of that is kind of already baked in relative to deliveries on the development side and commencement timing on leases versus speculative activity that you need to hit to get to that guidance?

I would say three quarters to go, it’s hard to say anything is all baked. That said, it's not overly dependent on external factors like a lot of acquisitions or development starts in the second quarter. We’ve already put to bed over half of our role for this year. So I repeat, it's not overly dependent on a lot of new developments. However, we feel optimistic about what we have out there as long as demand holds.

Your next question comes from the line of Bill Crow from Raymond James.

Two-parter on lease economics, if I could. How much of the wait-and-see attitude by tenants is encouraged by tenant reps who may be seeing some weakness in rent growth, and they’re thinking the economics might get a little bit better over time? And the second part of that is, have we now seen a peak in annual ramp-up rates, which got up to about 4% to 4.5%, starting to come down a little bit?

Bill, I think it's plateaued. I'd say it's like we're in a construction zone. You're still heading in the right direction, but we've run up to 4, and I think we're taking a breather. We haven't seen too much toward the tenant rep brokers’ perception of wait-and-see. It's more so tenants pushing expansions off until they have to make a decision. We're still seeing those, but I think it's kind of a wait-and-see approach.

If I could just follow up. What's going on with the watch list? Are you starting to grow increasingly concerned? Is that specific to any industry types?

It was a frustrating quarter in that 50% of our total bad debt was driven by one tenant, a high-end home decor group out of Southern California that filed for bankruptcy. They had an almost $300,000 straight-line balance. The other two tenants that made up a large portion were in logistics and beauty supply. All three of these were in California. We have 10 tenants with reserve balances, and collections remain strong.

Your next question comes from the line of Mike Mueller of JPMorgan.

I was wondering, what's the game plan now that you've entered Raleigh? Do you anticipate growth over the next few years coming primarily from acquisitions or building a development pipeline?

Mike, good question. We're excited about Raleigh. This quarter we sold all but one of our older Jackson assets. Moving our capital into better positions for growth. We had a suburban office building in L.A. that we were able to close. We were moving our capital towards Raleigh, where we want to grow. The market opportunities are important. We are still light in allocation to Las Vegas, but we like that market a lot, and we were able to grow and move to self-management. We want to grow in both Raleigh and Nashville. It's a slow process, consistently moving the median of our portfolio up each quarter.

Your next question comes from the line of Todd Thomas of KeyBanc.

Marshall, I just wanted to circle back to the company's capital deployment initiatives, specifically acquisitions. Does anything change for the company here as you look at your current cost of capital given the pullback in your stock and industrial REIT shares in the last few months? And would you change your return hurdles at all for new acquisitions?

We probably wouldn't change the return hurdles. If you were to do that, it would mean you're trading down in quality. We'll try to maintain that long-term growth. Our stock price today isn't very useful in terms of issuing equity for acquisitions. However, we have internal growth. If the capital markets weren't available, I'm glad we have that. We saw the markets be fluid and sometimes volatile, so we need to remain attentive.

And then if I could just follow up on the acquisitions. I think you mentioned that the accretion was about a dime. Can you clarify which acquisitions that comment corresponded to specifically? And Brent, can you discuss what amount of accretion is embedded in guidance from this year's acquisition and equity issuance?

What I meant was the first acquisition we made about a year ago was Craig Corporate Center in Las Vegas. Those totaled a little under $280 million, and those buildings are just over a year old in weighted average. We haven’t closed on Raleigh yet but are reasonably close to it. The GAAP yields compared to our equity costs add a dime to our earnings. It adds to the full year run rate, while also noting that two buildings are not yet fully accounted for as they haven’t closed yet.

In terms of budget and guidance, all prior acquisitions and budgets are dialed into our guidance. For $160 million in acquisition guidance, only $50 million of that is not earmarked. We’ve got acquisition placeholders for the second half of the year. We're not overly dependent on any one or two big factors for this guidance.

Your next question comes from the line of Aditi Balachandran of RBC.

Just a question regarding the tenant. What exactly are they doing to compensate for delaying decisions on needed space as you've talked about? Are they just running higher capacity through existing properties?

Yes. I think they're trying to make do with what they have for as long as they can. A lot of the conversations, I think the local warehouse managers are ready, but corporate is putting the expansion on hold. They may be crammed into their space, but they are making it work for as long as they can.

Your next question comes from the line of Jason Belcher of Wells Fargo.

Marshall, you briefly mentioned nearshoring and onshoring in your remarks. I’m wondering if you could give us an update on what you're seeing there? Are there any leasing activities driven by onshore and nearshore trends?

Yes, we still see strength, particularly in Arizona, where we are 100% leased in Phoenix and Tucson. This has been the best market for us over the last three years. In California, we've seen some challenges; however, San Diego has performed better for us compared to L.A. and San Francisco. The demand for nearshoring is significant, and we believe it has long-term implications. We have seen strong growth where there's access to consumers, and given the supply chain changes post-COVID, this trend will likely continue.

Your next question comes from the line of Ronald Kamdem of Morgan Stanley.

Just a quick one on the guidance for same-store NOI. You reiterated it, but if you think about sort of the 7.7% in Q1, there is a decent amount of deceleration happening. Are you guys billing conservatism, or is there a demand slowdown?

Yes. Based on our lease-by-lease assumptions, we project our same-store portfolio to kind of meander down before picking back up towards the end of the year. We have a somewhat budgeted projection for a decline in occupancy, yet we're still projecting solid same-store strength. This reflects healthy collections and a solid performance across the board.

I'm pleased that first quarter this year was among our best leasing volumes, but it's hard to compete against record-setting performance last year. We'll likely experience a tight market with low availability soon.

Your next question comes from the line of Jessica Zheng of Green Street.

Could you please touch on the subleasing trends in your portfolio? Are you seeing any elevated levels?

No, we’re not seeing elevated subleasing. There have been some small spaces, but not any notable increases. In most cases, prospects would prefer a direct lease. Our lease term fees are low, and we don’t expect significant changes to that trend.

Your next question comes from the line of Samir Khanal of Evercore ISI.

Regarding average retention rates, they came down quite a bit. Is that a function of the wait-and-see attitude, and how do you think that will play out for the year?

It's a good question. If you build a model on EastGroup, I'd say 70% to 75% retention is normal. Last year we were 79%. I think we’re sitting tight, and a high retention rate could suggest decisions are being delayed. I'm pleased with the first quarter's leasing volumes, and we’ll see how the next one goes. I hope it doesn’t stay at 56%, but a little leasing movement is needed.

Yes, regarding property operating expenses, they've increased sequentially and year-over-year due to rising real estate taxes and insurance, but we’re receiving reimbursements from tenants at high occupancies, which mitigates the impact.

Your next question comes from the line of Ki Bin Kim of Truist.

Typically, expense reimbursements don’t come back in the same exact quarter. Should we expect an uptick in reimbursement rates later this year?

We accrue and match that to keep it even. You'll see that be very consistent through the year, and we manage that process carefully to avoid swings in performance. Our expense is not going to have any major impact on the bottom line.

You’re in a good position with your balance sheet. Any thoughts on how we should expect that to change over time through acquisitions or M&A?

We've probably driven leverage down lower than our target for a while. The equity markets were attractive, and our debt markets have been less favorable. I view it as we should expect opportunities coming down the line as the interest rates normalize. We feel we’ve been able to grow the company as quickly as we have without engaging heavily in acquisitions. We will be patient and see how M&A opportunities make sense for us.

We raised equity through a forward offering, which is only a point more expensive. The cost of issuing remains quite low, and we have not felt the need to raise significant cash upfront over this process. Our main goal is to manage debt effectively.

Your next question comes from the line of Nick Thillman of Baird.

Did the tenants that drove bad debt make it onto the watch list previously?

A couple of the tenants were on the watch list, but not all. It was a surprising and sudden bankruptcy for one of them. The watch list remains very healthy, and we're monitoring it closely.

Over the last two years, occupancy levels have generally been above historic averages at 98%+. The market’s changing, but I don’t see us heading back to 95%, rather struggling to sustain that index with ongoing demand forces. I think a 97% average seems plausible as well as continued business growth in the coming years.

And just to clarify, out of the three tenants that drove the increased bad debt, two were on the watch list; one was not. So we've been aware of some issues with certain tenants.

Your next question comes from the line of Vikram Malhotra of Mizuho.

Can you comment on the demand from the larger boxes, specifically how that might affect smaller box demand?

It’s good to see Amazon back in the market. They’ve taken larger boxes, while we focus on being near the consumer. Amazon will build out around those big boxes and increase their delivery network; this will create demand for shallow bay spaces, increasing our viability for leasing in the long term. It seems like there’s a lot of runway for shorter delivery times to customers.

We don't have any questions at this time. Presenters, please continue.

Thanks, everyone, for your time and for your interest in EastGroup. If we didn't get to your question, Brent and I are certainly available post-call. We hope to see you at a couple of upcoming conferences.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.